Mirant converts climb over 6 points; Lucent, Motorola put pressure on telecom sector

By Ronda Fears

Nashville, July 16 - For the most part, sellers prevailed in convertibles while some players diverted money to Treasuries. Some of the heaviest selling took place in telecom equipment makers, on ill-boding remarks from Lucent Technologies Inc. and Motorola Inc.

Conversely, there were lots of bidders for airline paper, namely Continental Air Lines Inc. and Northwest Airlines Corp. in advance of their earnings Thursday, with a bit more confidence gleaned from better-than-expected results out of AMR Corp.

There also were still buyers for Mirant Inc. converts, however, and those issues added back more than 6 points on the day. But, Calpine Corp. and CMS Energy Corp. continued to slide.

"We lightened up quite a bit [in convertible positions] today," said a hedge fund trader in New York.

"We were buying Treasuries, like a lot of people, but I wouldn't say we are in the process of taking a lot of money off the table. Some of what we were selling I will be watching closely to get back into, I didn't really want to sell some of this stuff but just had to."

Credit quality concerns aside, dealers said players are still on the hunt for value with a concentrated bend toward yield.

To that end, all the airline paper was better bid. Northwest and Continental were mentioned the most, both moving up around 2-3 points, but Mesa Air Group and others also firmed.

"It's the same old song, different verse: everyone is looking for yield," one dealer said.

"But, risk aversion has reared it's ugly head again. People are not so flippant about moving down the credit scale today; in fact, they were selling some of the more questionable stuff they just recently picked up."

Mirant's converts were still seeing buyers on short-covering and the paper moved up about 6.25 points on the day to 41.25 bid, 42.25 offered. The stock remained closed at the Monday level of $2.01. The converts had plunged around 25 points Tuesday in the wake of the bankruptcy filing.

"That [Mirant convert] was still a major source of flow today," said a sellside trader who focuses on busted converts.

While buying continued in Mirant, selling took off in its peers, Calpine and CMS. Both of those power producers were somewhat weaker Tuesday in sympathy with Mirant, but traders said the selling intensified Wednesday.

"Calpine and CMS both were down around 2-plus points," one trader said.

The new CMS Energy 3.375% due 2023 was pegged at 96.625 bid, 97.125 offered at one big shop, but at 98.625 bid, 99.625 offered at another. The stock closed down 30c, or 4.23%, to $6.80.

Xcel Energy Inc. also followed the pack lower. The 7.5% due 2007 dropped about 1.5 points on the day to 141.5 bid, 142 offered while the stock lost 21c, or 1.46%, to $14.16.

TXU Corp. was another power name hitting the skids, with its converts losing 2 to 3 points.

Elsewhere, the headlines on Lucent and Motorola colored the landscape, so to speak, with a predominance of red.

A dismal outlook painted by both Lucent and Motorola on the wireless phone industry, in turn, also hurt Nortel Networks Corp. and splintered down to RF Micro Devices Inc., which makes circuit boards for wireless phones.

As expected, Lucent took a hard hit, with its convertibles plummeting 8 to 9 points, after losing ground on Tuesday as well.

The new Lucent 2.75% converts were very active, with the 2023 issue falling 8.125 points to 79.75 bid, 80.25 offered and the 2025 issue plunging 9 points to 80.25 bid, 81 offered. The old Lucent 7.75s were the most active, though, traders said, and that issue dropped 8 points to 71 bid, 71.625 offered.

Lucent shares fell 24c, or 12.5%, to $1.68.

Motorola and Motorola-linked issues lost anywhere from 1.5 to 3.5 points.

The Motorola 0% due 2013 lost 3.5 points to 76 bid, 77 offered. The Liberty Media 3.5% exchangeable due 2031, which converts into Motorola shares, lost 2.875 points to 70.3125 bid, 70.8125 offered. And, Motorola's 7% mandatory dropped 1.5 points to 32.25 bid, 32.75 offered.

Motorola shares dropped 45c, or 4.6%, to $9.33.

Nortel's converts declined 1 to 2 points and the new RF Micro Devices convert shed about 2.25 points, a trader said.

That said, he noted, Nextel Communications Inc. was higher ahead of its earnings release on Thursday. The results will appear before the open, and there is a conference call at 8:30 a.m. ET.

All three Nextel converts were firmer, he said, but there was more interest on the 6% due 2011 issue as it has a higher coupon and "there's more people picking up longer paper." The 6s added 1.25 points to 108.75 bid, 109.25 offered with the stock up 63c, or 3.25%, to $20.01.

On the subject of long paper, David Goldman, head of the global markets group research at Banc of America Securities, told a related light bulb joke in his daily Situation Room publication on Wednesday.

"How many central bankers does it take to screw in a light bulb? Only one; he holds the light bulb, and the world turns around him," Goldman quipped.

"Glued to the tube for two days of Greenspan's testimony, that's what the world appears to think. The Fed Chairman corrected them: the Fed does not control long rates."

Banc of America credit strategists reiterated a call for bear steepening and pushed their 10-year yield target to 4.25%.

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